In an elaborate presentation in March, Apple CEO Tim Cook revealed the biggest yet mash-up between the worlds of big tech and big finance, a card that supposedly reimagines consumers' relationship with plastic. Rivals of the investment bank wasted no time taking shots at the deal.
"Dude, if that portfolio ever makes money, I'm buying you a beer," an employee at the card department of a competitor texted a Goldman staffer.
Within the industry, the deal is widely perceived as one that's risky for a bank to take on. Citigroup was in advanced negotiations with Apple for the card, but pulled out amid doubts that it could earn an acceptable profit on the partnership, according to people with knowledge of the talks. Other banks, including J.P. Morgan Chase, Barclays and Synchrony also bid on the business. Apple and the banks declined to comment on this story.
It turns out that the Apple Card's consumer-friendly features – no fees of any kind, software that actively encourages users to avoid debt or pay it down quickly, and potentially lower interest rates – make it harder for banks to make money on the product. Even features like the card's calendar-based billing can impact a lender's cost of funding and servicing, since customers' borrowing will be concentrated at month-end, rather than spread out over weeks.
The Apple Card, available this summer, highlights the risks as tech giants increasingly partner with banks to infiltrate financial services. As the first credit-card by Goldman Sachs, it will be a test of whether the bank can profitably scale up a consumer business in the late innings of the U.S. economic expansion. Millennial borrowers, presumably a target for the Apple Card, are falling behind on credit-card debt by the most since 2011.
"There's a danger for any bank entering deals like this from a profitability standpoint," said Forrester analyst Peter Wannemacher. "Increasingly, they're wary of co-branding deals when it seems likely that the partner firm is the `cooler' brand. They'll consider making a deal with a company like Apple or Uber, but the danger is that the economic gains underwhelm."
The deal also shines a spotlight on an inherent tension within the trillion-dollar U.S. card industry: Big card issuers profit when customers fall into debt and stay there. Americans paid $113 billion in credit-card interest to banks last year, nearly 50% more than five years ago. So adopting the new fintech ethos of zero fees and transparent pricing makes for thinner profit margins.
Goldman is "thrilled" to be partnering with Apple, according to Andrew Williams, a spokesman for the New York-based bank.
"Goldman Sachs seeks to disrupt consumer finance by putting the customer first," Williams said in a statement. "We are excited for customers to use Apple Card, which is designed to help people take control of their financial lives."
To be sure, it's common for banks who don't win hypercompetitive contracts to immediately downplay the prospects for the winner. For instance, when American Express lost the Costco card to Citigroup in 2015, then-Amex CEO Ken Chenault told investors that "the numbers didn't add up" and agreeing to Costco's terms would've meant taking on an unacceptable amount of financial risk.
But Chenaults's bitter reaction at the end of a 16-year partnership exposes a reality of these types of deals: Big brands with millions of loyal customers are in the drivers' seat and command terms that benefit them, not the financial firms making those products possible.
The Apple partnership makes more sense for Goldman than Citigroup or J.P. Morgan for several reasons. Under CEO David Solomon, the 150-year old investment bank is pushing aggressively into consumer finance to help offset a decade-long decline in trading revenues. The Apple deal is likely just the first in a series of partnerships, and starting off with a high-profile partner will help Goldman in future negotiations.
Since Goldman has no old technology systems to overhaul or existing card business to defend, it's not risking a current money maker on a product with razor thin profit margins. The deal allows Goldman to add millions of customers to its consumer banking platform, which is mostly known by its Marcus brand.
But there are a few hurdles for Goldman, according to industry insiders.
With any card, the goal is to be the first choice in a users' wallet, but popular products like J.P. Morgan's Sapphire Reserve have richer rewards. Many of the heaviest card users game the programs by using different cards for various categories of spend, and it's unlikely they'll be persuaded to use the Apple Card unless the rewards are improved.
And unlike partnerships with big retailers like Costco, airlines or gas companies, where users make regular purchases, it's harder to model out how much Apple Card users will actually spend on the card. (Apple purchases are incentivized with 3% cash back, but how often do you buy a new iMac or iPhone?)
Goldman also has to scale up operations to serve millions of credit-card customers, something it has never done before. Goldman Sachs research analysts project that the card could garner 21 million users.
Still, only Goldman and Apple are privy to specifics of the deal that will impact how it performs for the bank. That includes how much Goldman is paying for the privilege of serving Apple's customers, as well as other revenue-sharing provisions, whether data is shared and who is footing the bill for marketing. The banks that participated in the bidding process for Apple Card signed ironclad nondisclosure agreements, said people with knowledge of the situation.
Ultimately, the success of Apple Card for Goldman hinges on factors that nobody knows, like how many customers sign on, how much spending they do on it, and the rates at which they default. Credit-card partnerships sometimes sour, ending in acrimonious litigation.
Goldman is hoping that by providing a card with a better experience and more transparent fee structure – things that align with the principles of their Marcus business – people will choose to funnel more of their spend to it.
"Apple Card completely changes the credit-card experience and is built to help customers lead a healthier financial life," Solomon told employees in a March memo.
-With reporting by Kif Lewsing and Steve Kovach
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